The Trouble with Pay Day Lenders

This month the Church of England finally ended their much criticised financial involvement with Wonga, the UKs largest pay day lender.   The sound of bells and rejoicing erupted throughout middle England and across the pages of the Daily Mail as the Archbishop consciously decoupled the chuch from the forces of evil.  By putting his blessing to the idea of credit unions as a viable alterative to pay day lending the Archbishop has been seen to stand up to the vicious forces of Mammon and claimed the moral high ground for the church and the forces of good.   Surely this is a good thing?  So why am I not convinced?

Here’s the thing – in a perfect world there would be no need for pay day lending.   Debt would be non-existent because everyone would have learned to live within their means and budget effectively – always putting away some money for a rainy day so that they could cover most eventualities.   And even, on the very rare occasion, when something truly calamitous occurred, an event beyond even the reach of the rainy day fund, then the caring, smiling family and friends would rally round to help out, in the short term, while folks got back on their feet.  In a perfect world.

But we don’t live in a perfect world.   We live in a world where people don’t budget, where people don’t save and where people live from one crisis to the next.  We live in a world where people are encouraged to shop, encouraged to consume, spend and accumulate goods and experiences.   We live in a world where families can be at war with each other and community is non-existent for many.  We live in a world where debt and benefits are the gilded handcuffs that lock people into relative poverty.   We live in a pretty imperfect world.

Now no-one in their right mind does not want to aspire to and work towards the perfect world described above, but, we also need to realise that right now, today, there are lots of our fellow citizens who are struggling to make ends meet and they are pretty darn desperate.   And where that desperation manifests itself as a need for cash at speed then that creates a market.  Today, that market can either be served by the dodgy door step lenders with baseball bats or by the regulated pay day lenders – they both have the business models to make it work, the Banks and credit unions don’t.  So, whilst I might not like the idea of desperate people reaching out for high cost short term loans from the regulated pay day lenders, the current alternatives, in this imperfect world, seem to be a lot less attractive to the customers.

But why, I hear middle England cry, don’t these people get the money they need from the Banks or as suggested by the Archbishop of Canterbury, from the community based Credit Unions?  The answer is complex and yet simple.  Whilst those that need high cost, short term loans are often on low incomes and often have imperfect credit ratings (both of which make it difficult for the computers at the Banks to say anything but “no” to lending them money) more importantly, they are often actually a bit embarrased and a bit ashamed about being in this position of desperation.   Fronting up to the personally probing questions of the Banks and Credit Unions is quite simply something most of the customers of the online pay day lenders are keen to avoid.  

Answering questions at the Bank or Credit Union such as – “What are the circumstances that have led you to need to apply for High Cost Short Term Credit?” are as appealing to answer face to face as “Which sexually transmitted disease do you believe you may have contracted?” at the Doctor’s or “Can you explain how your actions have led your partner to file for divorce?” at the Solicitors.  These are hard to answer for all but the most thick skinned and avoiding answering these face to face would be welcomed by most.   Given too that the Daily Mail et al are all too happy to portray those taking out pay day loans as either tragic victims or feckless, work shy, idiots, unsurprisingly most people want to apply for a pay day loan in as private a way as possible.  Online wins hands down.

This year, in the UK, millions of people will take out pay day loans online.   They will take them out simply, quickly and without embarassment.   The cash will move from the lender to their bank accounts in 15 minutes.  They will use the cash to dig themselves out of the hole they are in.  The majority will pay them back on time.   The experience will be OK.  However, their voices are rarely heard in the media and when they are they are usually pilloried or patronised.

Now, when it comes to listening to the customer, it is clear that this is something most pay day lenders have also failed to do.  The pay day lender organisations have generally preferred to focus on technology innovation and maximising their VC backed equity.  As a result there have been a litany of shoddy customer practices and rip offs in an immature and poorly regulated industry, but this is changing.  The good news is that the FCA is going through the industry like a dose of salts.  They are issuing fines, winding up orders and ensuring the industry acts in an acceptable manner.  This must continue at speed until the remaining industry is operating at an acceptable standard.  

So, in the meantime, whilst we work to ensure that future generations are better at saving, managing their money, avoiding debt, helping each other out and generally being better human beings I’d also like to suggest that rather than automatically decrying the pay day lenders (and in the process further stigmatising their vast customer base) that we try a little harder to understand the role they play in our flawed society and in particular to understand why they are such a popular source of credit.  For the social commentators in the media, the church of England and for the pay day lenders surely now is the time to actually listen to the needs of the customers and to truly hear what they have to say on this challenging industry.  We may all learn something new.

Given the imperfections of the current world, my personal belief is, that whilst instinctively we may not like them, it will be better for us all, and particularly the pay day loan industry’s customers, if we can support the regulator’s drive to clean up and reconfigure the pay day lending marketplace rather than trying to obliterate the industry and build and develop alternative lending solutions that just don’t meet the needs of the customers.   Sorry Archbishop, I applaud the sentiment, I just don’t applaud the proposed solutions as they don’t appear to me to meet the perceived needs of the customers – particularly the needs for speed and discretion that are afforded by the online solutions of the pay day lenders.   May be we should ask them.

Of course, if the church is offering to give money, advice and support to all the struggling people in their communities who are saddled with poverty and debt, that would be a perfect world solution and would undoubtedly put the pay day lenders out of business.   Of course it isn’t a perfect world, yet.